Protection Against Estate Tax Increases

I recently received a frantic call from Vincent. He’d meticulously crafted a revocable living trust five years ago, funded it with most of his assets, and felt secure. Then, his mother passed away unexpectedly, leaving him a substantial inheritance – pushing his estate’s projected value well beyond the current federal estate tax exemption. He’d printed a new codicil attempting to address this, but it wasn’t properly signed or witnessed, rendering it invalid. The potential cost? Hundreds of thousands in avoidable taxes and probate fees. This scenario, unfortunately, is all too common.

What’s Driving the Concern About Estate Tax Increases?

For years, the federal estate tax exemption has fluctuated with legislative changes. While the Tax Cuts and Jobs Act of 2017 doubled the exemption to over $12 million per individual (indexed for inflation), that law is scheduled to sunset on January 1, 2026. Unless Congress acts, the exemption will revert to approximately half that amount – around $6.8 million per person in today’s dollars. This means a significantly larger portion of the population will be subject to federal estate tax, and even sophisticated planning done several years ago may no longer be sufficient. Furthermore, states like California have their own estate or inheritance taxes, which can add another layer of complexity.

How Can a Living Trust Help Protect My Estate?

A well-drafted revocable living trust remains a cornerstone of estate planning, even with potential tax increases. However, the trust itself isn’t a magic bullet. Its primary function is to avoid probate, maintain privacy, and provide for the efficient management and distribution of your assets. But to actively mitigate estate tax liability, we need to incorporate specific strategies within the trust document. These might include credit shelter trusts, qualified personal residence trusts (QPRTs), or irrevocable life insurance trusts (ILITs). Critically, remember that signing the trust document is only step one—you must legally transfer assets (funding) to the trustee for the trust to exist, as outlined in California Probate Code § 15200.

What About the Federal Estate Tax Exemption in 2026?

The good news is that even if the exemption is halved, the OBBBA (One Big Beautiful Bill Act) permanently set the Federal Estate Tax Exemption to $15 million per person, meaning the primary focus of most Living Trusts is now avoiding probate and protecting privacy, rather than minimizing federal taxes. This significantly reduces the number of estates that will actually owe federal estate tax. However, for those with estates approaching or exceeding that threshold, proactive planning is essential. As a CPA as well as an attorney with over 35 years of experience, I can uniquely position your assets to maximize the benefit of the exemption and minimize potential tax liabilities. For instance, a proper ‘step-up in basis’ calculation on appreciated assets can significantly reduce capital gains taxes for your heirs.

What Happens if I Forget to Transfer an Asset to My Trust?

It happens. Life gets busy, and sometimes assets slip through the cracks. For years, the primary tool for dealing with missed assets was the Small Estate Affidavit. But the landscape is changing. For deaths on or after April 1, 2025, if a primary residence intended for the trust was accidentally left out (valued up to $750,000), it qualifies for a ‘Petition for Succession’ under AB 2016 (Probate Code § 13151). This is a court-ordered process, a “Petition” – not an affidavit – that allows a judge to transfer the asset according to your trust instructions. It’s a more secure and legally defensible solution than relying on the Small Estate Affidavit.

How Do I Protect My Digital Assets?

In today’s digital world, your estate plan must address your digital footprint. Without specific RUFADAA language (Probate Code § 870) in your trust, service providers like Apple, Google, and Coinbase can legally deny your successor trustee access to your digital photos, emails, and cryptocurrency. We need to include provisions that authorize your trustee to access and manage these accounts, complying with both legal requirements and platform terms of service.

Proper Funding: Ensuring all assets are legally transferred into the trust’s ownership.
Regular Review: Updating the trust to reflect changes in your assets, family circumstances, and tax laws.
Tax-Smart Strategies: Implementing advanced planning techniques to minimize potential estate tax liability.

What About Business Assets and LLCs?

If you own a business, especially an LLC, proper planning is crucial. As of March 2025, domestic U.S. LLCs held in a living trust are exempt from mandatory BOI reporting; however, trustees managing foreign-registered entities must still file updates with FinCEN within 30 days. Furthermore, the ownership structure and operating agreement should be reviewed to ensure seamless transfer and continued operation of the business after your death.

What causes California trust administration to fail due to poor funding, vague terms, or trustee misconduct?

The advantage of a California trust is control and continuity, but this relies entirely on accurate funding and disciplined administration. Without clear asset titles and strict adherence to fiduciary standards, a private trust can quickly become a subject of public litigation over mismanagement, capacity, or undue influence.

To ensure the plan actually works, you must move assets correctly using how to fund a trust, and ensure all players understand their roles by identifying the trustees and beneficiaries to prevent confusion when authority transfers.

A stable trust administration relies on the trustee’s ability to balance investment duties, beneficiary communication, and tax compliance. When these elements are managed proactively, families can avoid the emotional and financial drain of litigation.

Verified Authority on California Trust Law

• Trust Validity (Probate Code § 15200): California Probate Code § 15200
  The foundational statute confirming that a trust requires property to be valid. This is the legal basis for the “funding” requirement—without transferring assets (deeds, accounts) into the trust, the document is legally empty.
• Revocability Presumption (Probate Code § 15400): California Probate Code § 15400
  Confirms that California trusts are presumed revocable unless stated otherwise. This grants the settlor the flexibility to change beneficiaries, trustees, or terms as life circumstances evolve.
• Primary Residence Succession (AB 2016): California Probate Code § 13151 (Petition for Succession)
  Effective April 1, 2025, this statute acts as a backup for funding errors. If a home (up to $750,000) is left out of the trust, this Petition avoids a full probate administration.
• Property Tax Reassessment (Prop 19): California State Board of Equalization (Prop 19)
  Essential for all trust creators. While the trust avoids probate, it does not automatically avoid property tax increases for heirs. Specific planning is required to navigate the “primary residence” requirement for children.
• Estate Tax Exemption (OBBBA): IRS Estate Tax Guidelines
  Reflects the OBBBA permanent increase to a $15 million per person exemption (effective Jan 1, 2026). This shifts the planning focus for most Californians from tax avoidance to asset protection and probate avoidance.
• Digital Asset Access (RUFADAA): California Probate Code § 870 (RUFADAA)
  Without this statutory authority included in your trust, your digital legacy (crypto, social media, cloud storage) may be permanently locked away from your family by service providers.